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Largest deficit since surplus target introduced

The deficit in public finances next year will be the largest since the surplus target was introduced: SEK 87 billion, or an amount equivalent to 2.3 per cent of GDP. The deficit in public finances will continue until the end of 2016. Margins for the expenditure ceilings are shrinking. When the need for a safety margin is taken into account, there is no scope for permanent increases in expenditure. GDP will increase this year by a mere 0.9 per cent, which means that Sweden will see zero growth in per capita terms. GDP growth for next year will be stronger, 2.3 per cent.

Growth stronger in 2014

The weak development in the Eurozone has affected Swedish exports, which has fallen in 2013. Domestic demand has also been affected by the uncertain economic environment in the world, but this year domestic demand has still been the driver of growth. GDP growth for 2013 is estimated to amount to 0.9 per cent. Growth in the world will increase in the coming years, although the recovery is expected to be slow. Swedish exports will pick up in 2014. Households are expected to increase their consumption when the uncertainty declines. The improving economic activity sparks a revival in investments in the economy. GDP growth for 2014 is expected to be 2.3 per cent in calendar adjusted terms.

Employment has increased relatively strongly and will continue to rise when demand in the economy picks up. Tax cuts in 2014 will increase growth in the economy and the demand for labour in the short term, but it is expected to also increase employment in the medium term as well. As of next year, the increase in employment will lead unemployment to fall.

Subdued growth in tax revenues

Total tax revenues will increase by 2.2 per cent in 2014. This weak growth, which is due mostly to a combination of tax cuts and a weak growth in tax on capital income, will mainly affect central government tax revenues. Tax revenues for the local government sector and old-age pension system will grow more strongly as these are largely dependent on the development of wages, which will increase more quickly than the other tax bases in 2014.

Revenues from taxes on labour income, which account for 60 per cent of total tax revenues, will increase more in 2014 as a consequence of a rapid growth in the number of hours worked and in wages compared to 2013.

Tax on corporate profits will fall in both 2013 and 2014 due to a cut in the corporate tax rate and weak profit growth, mainly for export companies.

Household consumption will grow strongly from 2014, which will help tax revenues from value-added tax to increase more quickly after having undergone weak development between 2011 and 2013. However, tax revenues from consumption will grow slowly in 2014 due to a reduction in energy taxes, due in part to lower electricity and petrol sales.

Moderate underlying growth in central government expenditure

In 2013, total expenditure on central government budget will increase by SEK 104 billion, or almost 13 per cent, compared with last year, amounting to SEK 917 billion. This upturn is due mainly to the central bank borrowing approximately SEK 100 billion within the National Debt Office this year. Total expenditure on central government budget for 2014 will amount to SEK 50 billion less than this year, primarily as a result of lower net lending. As a percentage of GDP, expenditure will fall from 23 per cent in 2012 to 20 per cent in 2017. The expenditure ratio will decline at approximately the same rate as throughout the last decade.

The largest increase in expenditure during the forecast period, expressed in SEK billions, will be financial security for families and children, primarily as a consequence of increasing expenditure on child benefits and parental insurance. The increase in expenditure on parental insurance is due in part to the fact that average pay is increasing, and also to the fact that the number of days for which parental benefits are claimed is increasing.

Expenditure in the area of Migration and Integration will increase massively in percentage terms in 2013 and 2014 as the number of asylum seekers, mainly from Syria and its neighbouring regions, is expected to be very high. As a large number of these people will be granted residence permits, the need for places in the municipalities will increase: this means that expenditure for municipal remuneration will increase greatly.

The fairly small margins to the expenditure ceiling for 2014 and 2015 mean that it will be important to monitor expenditure development carefully in future. Over the last few years, expenditure linked with migration and sick leave has had a tendency to be higher than forecast. Expenditure development in both of these fields is expected to slow, but there is a great deal of uncertainty.

Central bank loan triggers substantial borrowing requirement

The budget balance of the central government for 2013 is estimated to show a deficit of SEK 130 billion. This is a significant deterioration compared to the deficit of SEK 25 billion 2012, primarily due to the central bank borrowing a further amount of approximately SEK 100 billion within the National Debt Office. Weak tax revenues for 2013 are offset by the fact that the government has sold shares in 2013. Almost the entire amount of total government revenues from share sales SEK 42 billion, relates to shares in the bank Nordea. The budget balance is forecast to show a deficit of SEK 95 billion in 2014. The national debt as a percentage of GDP is expected to grow relatively substantially this year, by 3.2 percentage points, to almost 35 per cent. This will continue to increase to 36 per cent in 2014.

Largest deficit in net lending since surplus target introduced

Public finances will be in deficit between 2012 and 2016 and a surplus will not be achieved until 2017. The deficit in general government net lending for 2013 amounts to SEK 50 billion, equivalent to 1.4 per cent of GDP. The deficit for 2014 will increase to SEK 87 billion, or 2.3 per cent of GDP. This will be the largest deficit since the surplus target was introduced in 2000.

The central government net lending is expected to be significantly negative in both 2013 and 2014. The deficit amounts to SEK 41 billion this year and SEK 78 next year. Net lending is expected to be negative in 2015 as well.The local government net lending is expected to be negative for 2013, in the magnitude of SEK 6 billion. The accounting results, on the other hand, will be positive.

Net lending in the old-age pension system is negative, a deficit of SEK 3 billion for 2013, an amount equivalent to 0.1 per cent of GDP. However, for 2014 net lending in the old-age pension system will be positive as pension payments will be low when the average pension is reduced by 2.7 per cent.

Surplus target will not be met

The indicators for assessing the surplus target suggest that this target will not be met. Discretionary measures such as tax increases or cuts in expenditures will be required in order to meet this target. It is up to the politicians to decide how quickly and with what means this target is to be met. In the long term, savings will be reinforced by the fact that public expenditure will increase less extensively than GDP growth, known as Automatic Discretionary Fiscal policy (ADF). Although this effect is strong, there will be no sufficient surpluses during the forecast period.

No scope for permanent increases in expenditure

The margins to the expenditure ceilings have deteriorated. These margins will amount to SEK 15 billion and SEK 23 billion respectively for 2014 and 2015, which is a small in magnitude considering the uncertainty prevailing with regard to developments in areas such as sick leave, unemployment and migration. There is no scope at all for permanent increases in expenditure when the need for a safety margin is taken into account.

Deficit greater than in Budget Bill for 2014

ESV's forecast is less optimistic than the forecast in the Budget Bill for 2014. Macroeconomic development is expected to be weaker, not least in the longer term. The balance of the central government budget and the general government net lending is considerably lower in ESV's forecast. For example, the difference in respect of net lending amounts to almost 1 per cent of GDP, approximately SEK 40 billion annually. This difference in financial savings is largely due to the fact that ESV has a lower forecast for revenues from tax on capital income, not least in respect of taxes on corporate profits. Hence ESV, in the longer term, has a less optimistic view of macroeconomic development, which will result in subdued tax revenues in general.

ESV has not included the increase in the threshold for central income tax which was proposed in the Budget Bill for 2014 but rejected by the Swedish Parliament on 11 December 2013.